* Dollar rallies after Bernanke testifies to Congress
* BOJ upgrades economic assessment, stands pat as expected
* Dollar climbs to 4-1/2-year high vs yen, 9-month peak vs
NEW YORK, May 22 The dollar rallied to trade at
a fresh 4-1/2-year high against the yen on Wednesday after
Federal Reserve Chairman Ben Bernanke warned that holding
interest rates too low for too long has its risks and raised the
possibility the Fed could at least slow its bond purchases.
Initially the dollar sold off as investors focused on the
first headlines citing Bernanke saying monetary stimulus is
helping the U.S. economy recover but it was too soon to remove
Those remarks were in line with sentiment of recent days
which had seen dollar weakness and were widely anticipated,
including in the trading moments leading up to Bernanke's
testimony. But investor focus shifted rapidly as Bernanke raised
the possibility of reducing the Fed's bond purchases this year
if economic growth improves further..
"If we see continued improvement and we have confidence that
that's going to be sustained, then we could, in the next few
meetings, we could take a step down in our pace of purchases,"
said Bernanke during the question-and-answer portion of his
testimony before the U.S. Joint Economic Committee.
That followed remarks where he said "The Committee is aware
that a long period of low interest rates has costs and risks."
For investors scrutinizing the testimony and each and every
headline, it was all the impetus they needed to buy the dollar.
"This is the first time we have heard Fed Chairman Bernanke
warn on holding interest rates too low for too long," said David
Song, analyst at DailyFX in New York.
The euro fell to a session low of $1.2867, while the
dollar rose to a fresh 4-1/2-year peak against the yen at 103.60
and a nine-month peak against the Swiss franc of 0.9812
The euro was last at $1.2882, down 0.2 percent, while the
dollar was up 0.8 percent at 103.31 yen and up 0.9 percent at
0.9788 Swiss franc.
There had been speculation prior to this week that recent
improvement in the U.S. labor market would drive the Fed to
begin reducing its bond buying, a process known as quantitative
easing, later this year.
Attention now turns to the release of minutes from the last
Fed policy meeting due at 2 p.m. (1800 GMT).
SWISSIE A FOCUS
The euro hit a two-year high against the Swiss franc
of 1.2648 francs after Swiss National Bank chief
Thomas Jordan did not rule out negative interest rates and said
policymakers could adjust the euro/franc currency cap if
UBS said its forecasts for the euro/Swiss franc and the
dollar/Swiss franc are 1.27 and 0.99 in three months' time but
there are upside risks to its targets.
Earlier in the global trading session, the Bank of Japan
kept policy steady, as expected, and upgraded its assessment of
Governor Haruhiko Kuroda said he did not expect long-term
rates to spike given the scale of the BOJ easing and reiterated
that there was no change in the goal of achieving 2 percent
The euro hit a 3-1/2-year high of 133.77 yen, up
16.3 percent on the year.
Traders said the yen was likely to come under more pressure
once outflows gather pace from Japanese investors seeking higher
"The (Abe) administration is looking for further yen
weakness, but we think the pace will slow," said Chris Walker,
currency strategist at Barclays in London.
Sterling fell to a seven-week low against the dollar
on Wednesday after an unexpectedly sharp drop in retail sales
sparked concerns the Bank of England could opt for more monetary
easing in the coming months.